Several small STRs? Or one large unit?

Question

I stand to collect a significant windfall in early 2019, and I am contemplating how best to put the money to work. I like the idea of short-term rentals, and I am wondering if I would be better off buying several smaller, less expensive units, or one larger, nicer unit. Those of you with experience in the Airbnb Marketplace, what are your thoughts? Would three or four two-bedroom units be a better or worse idea than one 4-5 bedroom unit? If it matters, the market area would be Freeport or Galveston, Texas.

Julie McCoy · Answer

Jon, I agree with everything you said, except the implication that the smaller units won't get rented in an economic downturn. :) Sure, the ones feeling the squeeze the most won't be traveling, but there will be plenty of people who can still manage a week/weekend away, and maybe they'd normally rent a bigger/nicer place but the smaller unit will do just fine. Also, why assume that those who rent smaller units aren't well-off? Couples of (almost) all income levels travel and I imagine most of them are perfectly happy to rent a place that isn't huge. I've made it a point to position my units at a level where they're nice, but not luxury. I want to be attractive to someone who might be splurging but can't afford luxury; to people who can afford luxury but want to be more frugal; and to all the rest who will get a nice spot in their budget range. As Avery Carl put it to me once, there's Nordstrom, Target, and Wal-Mart - you want to be Target.

Julie McCoy · Answer

I own three studio or 1-bed cabins in Pigeon Forge/Gatlinburg, TN and one 3/2 house outside Sequoia National Park in California. Purely from an investing standpoint, I love the little cabins the best. I've found that dealing with traveling couples or small families is vastly easier than the larger groups that come to my CA house. I don't stress about the TN houses, but I do stress about the CA house. I can't do an apples-to-apples comparison on the ROI because obviously, they're different markets - but they're all in the same ballpark. I'll buy 1BR places all day long, but don't want anything bigger. Now, I definitely think you should look at what's in demand in your particular market, but based purely on operational ease, I'm all for the little units.

Jon Crosby · Answer

Hi @Andrew Taylor, I think @Sid Payne makes a lot of great points here regarding your question so I will not be redundant. However, It sounds like you might not have ever done a short term rental before so I would take your question back one step to make sure that STRs is what you truly want to do. Owning/managing an STR is not as simple or straightforward as standard rentals and to successfully run them you need to have good systems and procedures in place to sustain them. Here is one of my BP articles just to provide a little context: https://www.biggerpockets.com/blogs/10042/64744-5-...Even though you are taxed at passive income, STRs are really not passive at all unless you are going to go for a full turnkey provider, and if you do that you are likely not going to maximize your ROI unfortunately. As for the size/scale thing, once again always look for economies of scale where you can. A potential better option would be a multi-family property that is an STR if you can find it (rather than one big house or a bunch of smaller separated ones). If there is the inevitable downturn in the market just remember, those who would normally rent the smaller units are going to take less vacations then the wealthy who will still want to take their vacations. ;)Best of luck!

Michael Greenberg · Answer

I concur with @Sid Payne, and are experiencing as he suggested in my market. I have two (2) 2-bed condos and (2) 4-bed houses. One house generates what both condos are generating. However, I do like a bit of diversity and will likely hang on to at least one condo as I continue to build out the rest of my portfolio. Best of luck Andrew, hope that helps!Mike

Sid Payne · Answer

I don't know that market. However, I think there is an economy of scale that you get with slightly larger places, ones that can accommodate 2 or maybe even 3 families. With a smaller place, you are still dealing with the same number of people but for less profit per night. With larger, fancier places, I think you are reliant on larger groups or people with a lot of money. I don't know if this is true with larger, nicer places, but I am always worried that dealing with rich people will not be as pleasant as they tend to be more demanding.I have 4 properties, 1 4-bedroom, 2 5-bedroom and 1 6-bedroom. I have found that the 1 5-bedroom I've had on the market for a while does the best. I have also found that since I am in such a competitive market (central Florida) that the rate is low enough on the 4-bedroom that I often get couples who could stay in something much smaller but find our house worth the slightly higher cost. Compared to a hotel, all of them are a steal.

Villy Ellinger · Answer

I have two larger ones and one studio. I agree with the above comments about researching the market. As @Mike Verna mentioned above, demand for certain properties is key. So if there is scarcity in one type yet the demand is higher, that is definitely a consideration. I do have to point out that regardless of cash flow, or return on investment, etc, the smaller units are A LOT MORE LABOR-INTENSIVE. At the same time because of the smaller scale of everything involved with smaller places, at a certain level (e.g. studio) you may not be able to find a high-quality management company that is willing to take on the property because the fee vs labor time ratio may not be worth their time. They charge % of revenue. So with studio type properties you should be prepared to manage yourself. I think that's the best option anyway, but not everyone wants to deal with it.

Wendy Schultz · Answer

I've had requests lately from friends and colleagues who are looking for a larger place to host a family reunion. The largest I have currently is 4 bedrooms but I'd like to get into larger places eventually. As mentioned above, there is some economies of scale with the larger places. Cable bill, pool maintenance, etc are things that cost pretty much the same regardless of the size of the home. Plus, you deal with one reservation rather than several smaller STR reservations. The jury is still out for me on this but I hope to eventually venture into larger venues.

John D. · Answer

This question is extremely market specific. If you are driving distance from a major city (or major cities like we are -- LA and SD), you'll have a better chance with a high bedroom count home. Families and corporate groups alike can travel in large groups driving a few hours away. If most people are flying to your destination, it's much harder to get 15-30 or more people together, and those larger homes stand less of a chance.While I've done a bit of research in Galveston, definitely not enough to answer your question.Another angle to consider if it's legal from a short-term rental and ordinance perspective, buy a home with a number of large bedrooms, and create exterior doors to each of them, put in a kitchenette with a microwave and mini-fridge, and rent them separately, in particular if most/all of them can have en-suite bathrooms. I've been itching to do that for a while, still haven't found the right home.

Caroline C. · Answer

@Andrew Taylor As @Mike Verna says, the thing about the smaller units is that there are many more of them on the STR platforms, so there is a lot of competition. But if you have a nice unit that shows well in photos and has good reviews, you'll tend for them to be rented consistently, and if you can have 4 small places consistently rented, I think you'll make more money than 1 large place consistently rented. But there are so many other factors. For me, my 2 small rentals are in apartment complexes without a lot of maintenance besides HOA and cleaning and utilities, but my nice rental (that gets 3x the nightly rate of the small ones) is a big house with a pool and has very high monthly costs, and more things that break down over time, so my expenses on the big rental are much higher than I would have thought. So, the problem with my big place are my ongoing expenses are higher than I thought, and the problem with my smaller places is that there is a lot of competition to keep them consistently rented. There is no formula. You will probably do fine either way, it may be more of what you are comfortable with. If you are self managing, perhaps the 1 bigger place is best so you aren't dealing with multiple guests and check-in / out on the same day. Also check out AirDNA or similar for a 1-month subscription. You can drill into things like by bedroom in a market what is the filled/vs vacancy rate, etc.

Mike V. · Answer

Sounds like I’m in the minority with my STRs. I only buy larger units in my market because there’s a thousand 1 bedrooms, 500 2 bedrooms, and only a 100ish of 3+. At any given time when families search my area, if mine is available It’s one of a few to pick from. In my market the scarcity of larger units makes me king. This question depends entirely on the local market and the local market is what will answer this question.